As credit policy managers firm up their operational budgets for 2023, keep an eye on the global economy, not just the U.S. While few top issuers operate outside of their native markets in credit cards, issuers such as Barclays, Capital One, Citi, Santander, and Standard Charter must consider broader markets.
When the economy boils, expect two significant credit card risk trends. Revolving debt will begin to swell, then fall as charge-offs increase and purge weak accounts from their loan books. Concurrently, with an upcoming recession, unemployment will rise causing household budget pressure followed by increased delinquency. It’s all one big cycle.
Perhaps it’s time to reconsider new account risk and eliminate zero-percent balance transfer offers that appear in my mailbox almost daily. New accounts are the lifeblood of credit, but credit card issuers need to upgrade their standards to protect from the early burn-off from well-intended new accounts.
The Organization for Economic Co-operation and Development (OECD) represents 38 countries in Europe, Latin America, and North America. Recently, Reuters reported on a statement from OECD.
- While global growth this year was still expected at 3.0%, it is now projected to slow to 2.2% in 2023, revised down from a forecast in June of 2.8.
- The Paris-based policy forum was particularly pessimistic about the outlook in Europe—the most directly exposed economy to the fallout from Russia’s war in Ukraine.
Here in the U.S., credit policy managers must be sensitive to political grandstanding on interchange, which comes at the wrong time. If interchange income goes down while charge-off expenses go up, consumer lending will be an unprofitable mess that will take years to unravel.
Credit card lenders exposed to multiple markets will have some hard decisions. Those in limited markets, such as the U.S., will not have an easy task either.
It’s time to batten down the hatches. Charge-offs in the U.S. were running below 2%. Check in with us same time next year and expect losses to be twice that.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group.
